The United Kingdom is fast becoming a cautionary tale for how bad politics can lead to even worse economics. Prime Minister Liz Truss was once seen as a new hope for breathing life back into the sinking fortunes of the U.K. Conservative Party after its previous leader, Boris Johnson, squandered the goodwill of success with the COVID-19 vaccine programme and embarrassed Downing Street with the Partygate scandal. Now, Ms. Truss is in her party members’ crosshairs after foisting a disastrous set of economic policy proposals on the country, which was already shuddering under the weight of global developments impacting energy prices, inflation, and economic activity. Flipflops, U-turns and a lack of coherent long-term strategy for economic stability and growth have marred what little merit there might have been in her advocacy of policies to transform the U.K. into a “high growth, low cost” economy. The questionable, doctrinaire ideas at the heart of the Truss government’s missteps, which in its worst moments required the Bank of England (BoE) to step in with a £65bn emergency bond buying programme to stabilise gilts and the cost of government borrowing, stem from her campaign promise to cut taxes extensively. While most Tories would in principle be happy with that proposition, what has befuddled macroeconomists is that instead of following up her energy price guarantee scheme — a timely intervention in the face of rising gas prices linked to the Ukraine invasion — with consultation with the BoE on stabilising inflation, Ms. Truss jumped headlong into tax cut mode.
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The cost of this ill-timed fiscal foray was severe. The proposal of Ms. Truss and erstwhile Chancellor of the Exchequer, Kwasi Kwarteng, to abolish the 45% top rate of income tax on incomes of £150,000 or higher, raised eyebrows. Combined with their unfunded plan to scrap an increase in corporate tax from 19% to 25%, from next April, it was clear that these measures would burn £45bn in government finances. The market turmoil has signalled the true extent of disapproval of Ms. Truss’s formulas — yields on 10-year government bonds jumped from 3.5% to 4.3%, then held firm at nearly 4.05% after BoE intervention. Meanwhile the pound lost value, the mortgage market was thrown into chaos, and the country is now staring at a bumpy path ahead before inflation can be tamed. Far from being the leader who could extricate the Conservative Party from its shambolic, scandal-ridden image, Ms. Truss has likely added the label of “incompetence” to the Tory governance image. For her poor performance, her time on Downing Street may draw to a close sooner than she expected.
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